Adjusting for larger than expected inventory gains, HPCL’s earnings missed our estimate in both refining and marketing. The company announced an interim dividend of R22.5/share amounting to over 50% of 9M earnings. We continue to expect a significant beat in consolidated earnings for full year FY17E — our estimate is 26% ahead of consensus. Despite outperformance over last 12 months, valuations remain reasonable at 8x P/E and 6x EV/Ebitda. Maintain Buy.
Miss in Q3, adjusting for large inventory gains: While HPCL’s reported Ebitda was in line with our estimate, this was on account of larger than expected inventory gains in both refining – R5.4 bn or $ 2.3/bbl out of reported GRM of $6.4/bbl—and marketing – R7 bn vs. est. of R3 bn. Adjusted for these, both refining and marketing earnings missed our estimates. Lower interest expense in the quarter was offset by a miss in other income.
Dividend of R22.5/share: HPCL announced an interim dividend of R22.5/share amounting to over 50% of 9MFY17 and 40% of FY17e standalone earnings.
On track to beat consensus estimate in standalone: HPCL’s 9MFY17 standalone net profit is already 90% of full year consensus estimate. As a result we expect consensus earnings to be upgraded even post the disappointment in Q3 — our standalone estimate is 14% ahead of consensus.
Expect significant positive surprise in consol earnings: We maintain that HPCL’s full year FY17 consolidated earnings will provide a significant positive surprise due to strong performance by its key JVs: HMEL and MRPL. Our consolidated earnings estimate for FY17e is 26% ahead of consensus.
Updating Three Factor Valuation Framework — Maintain Buy: We update our model to reflect higher refinery throughput, lower non-diesel marketing margin and higher contribution from subsidiaries. We also update and roll forward our Three Factor Valuation Framework to get a fair value of R618.
Valuation: Our SOTP fair value of R618 (prev. R512) implies 9x P/E and 7x EV/Ebitda on FY18/19E earnings.
Key risks: (i) Lower marketing earnings, GRM; (ii) sharp rise in crude price to over $75/bbl; (iii) adverse government action.
Target Investment Thesis: * Gradual improvement in marketing margin of diesel and other unregulated products.
* Crude price stays below $75/bbl
*GRM of 5.5/5.7/5.3 $/bbl in FY17-19e.
*Diesel marketing margin of 1-1.2 R/litre in FY17-19e.
* EPS of 69/66.6/69.2 R/share in FY17-19e.
*Fair value of R618 based on Three Factor Valuation
*Crude price remains below $50/bbl.
*Better than expected marketing margins by R0.1/l and refining margins by $1/bbl.
*Better than expected performance by HMEL and MRPL.
*Fair value of R750 based on Three Factor Valuation
*Crude price goes up to $80/bbl.
*Lower than expected marketing and refining margins. Lower than expected contribution from HMEL and MRPL.
*Fair value of R450 based on Three Factor Valuation
HPCL is a large oil marketing and refining company and is majority owned by the government of India. It has ~25% market share in retailing of petrol and diesel. It has total refining capacity of 14.8 MMT. It is also part of the joint venture HPCL-Mittal Energy Ltd (HMEL) that has commissioned a 9MMT green field refinery in Bathinda in FY13.